Clydesdale Bank miscalculated the repayments on more than 42,500 mortgages –
and then tried to cover it up.

Tens of thousands of Clydesdale Bank mortgage customers will receive up to £18,000 in compensation for errors made by the lender.

Clydesdale, which is owned by National Australia Bank, miscalculated the repayments on more than 42,500 mortgages and failed to inform customers.

As a result, around 22,000 of people steadily paying off a home loan face a shortfall at the end of the typical 25-year mortgage term. This ranged from £20 to more than £18,000.

The City watchdog, the Financial Conduct Authority, today issued a damning criticism of the way Clydesdale handled the problem. It fined the bank £8.9m for “failing to treat customers fairly” and ordered it to pay compensation and write to those affected.

It said the damaging implications of the calculation error, which was discovered in April 2009 but only corrected in 2010, were simply “passed on” to customers.

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In response to botching its calculations, Clydesdale simply tried to increase monthly repayments made by customers. The FCA said all 22,000 customers faced “unexpected increases” in monthly bills both to correct the error and to make up for their shortfalls.

Tracey McDermott, director of enforcement and financial crime at the FCA, said: “For most people mortgage payments are their biggest monthly outgoing and we all budget on the assumption that the information our mortgage lender gives us about what we need to pay is correct.

“Here Clydesdale failed in that basic duty and, when it discovered the problem, sought to pass all of the consequences on to its customers – expecting them to find the money to remedy mistakes which were entirely of Clydesdale's making.

“Firms must put the interests of customers at the heart of their business if we are to restore trust and confidence in financial services. Clydesdale is today paying the price for its decision to put its bottom line ahead of the need to ensure its customers were treated fairly.”

The letters sent to customers suggested that they had no alternative but to bring their repayments up to date, the FCA said.

By law, customers could have rejected these demands because the error was not theirs. This “lack of clarity” was exacerbated by “poor instructions” to Clydesdale’s call centre staff, who therefore failed to deal properly with complaints.

The FCA said the average shortfall faced by customers was £970. It has the power to require a firm to contact customers and provide redress to those who respond and can show they lost out.

However, it said the compensation scheme, which has been volunteered by Clydesdale itself, goes further. Customers who faced a shortfall as a result of the error will be automatically compensated. Those who overpaid can make a claim for compensation if they believe they suffered financially as a result of Clydesdale’s error.

The FCA said the £8.9m fine "would have been higher" were it not for this voluntary action. Clydesdale also received a 30pc discount for settling at an early stage of the enforcement process.

Customers who were left with shortfalls will automatically be compensated and the bank is writing to all customers who were affected by the blunder. Mortgage holders do not have to do anything until they are contacted by Clydesdale to explain what the next steps are.

David Thorburn, chief executive of Clydesdale, said he was "very sorry" that the situation had not been handled properly.

He said: "We should have made it clear at the time that this was entirely our fault and that some customers may be entitled to compensation.

"Our priority is to fix this for customers as quickly as possible and they will each receive a letter explaining how we will make this right for them."

Some 14,000 customers will see an "immediate resolution", including a full apology and a refund within the next 48 hours, he said.

The vast majority of other customers with more complicated cases should hear from the bank in the next couple of weeks.

Some customers may also be entitled to compensation for extra charges they have had to incur as a result of the original mistake, such as bank charges.

Consumers can still take their case to the financial ombudsman, which resolves disputes between consumers and financial institutions, if they are unhappy.

The bank's "lack of clarity" was made worse by poor instructions given to call handlers for dealing with customers who called to complain, the FCA said.

The regulator said the fine would have been higher had it not been for Clydesdale's redress scheme, and the bank received a 30pc discount for settling at an early stage.

The Australian-owned bank will now write to customers affected by the error who did not receive compensation following the bank’s original communication exercise. Mortgage-holders do not need to do anything until they are contacted by Clydesdale, the FCA said. Further information is online at www.cbonline.co.uk.